April 30, 2010

For the past few days I’ve been following the news surrounding the testimony of Goldman Sachs executives before a Senate panel investigating the investment bank’s role in the financial crisis. Wow! If you haven’t followed this crazy ride, the transcripts from the hearings can be found all over the web and while there are still more questions than answers, it points to a major disconnect in our capital system.

The dialog is almost comical. Certain lawmakers compared the bank’s mortgage bankers to bookies – with the senator from Nevada further expressing his displeasure by saying, “Bookies have more ethics than Goldman.” Senator Carl Levin asked repeatedly why Goldman Sachs sold securities that their internal emails called “really sh*tty deals.” If the frauds perpetrated here weren’t so frustrating and disheartening, the dialog would make Lenny Bruce laugh out loud. Levin used the term “sh*tty” 11 times in one set of questions and began to ask the Goldman executives if they could define degrees of “sh*tty” in the deals they promoted.

Levin also asked Daniel Sparks, who ran the bank’s mortgage unit at the time, “How about the fact that you sold hundreds of millions of that deal after your people knew it was a sh*tty deal. Does that bother you at all?” While there was a great deal of polite posturing by Mr. Sparks, the apparent unspoken answer was not only “No”, but “Hell No!” Other questions related to Goldman’s “moral obligation” or “duty of care toward the best interest of the client” also received a “yeah, not so much…” response - really scary and sickening.

This past Monday I had the pleasure to be in New York for McGraw Hill’s publication premier of Buffett's Bites: The Essential Investor's Guide to Warren Buffett's Shareholder Letters. Buffett’s Bites is a stellar book written by a good friend of mine, LJ Rittenhouse. Rittenhouse has been fighting for transparency and improved corporate communication for years. She helps CEO’s formulate their shareholder letters and has created a very interesting ranking based on the candor, or lack thereof, found in many CEO letters. Rittenhouse recognized that Buffett’s letters are his legacy. As you read these letters, you realize his demand for an appropriate use of capital and you begin to understand the core of his investment philosophy.

Rittenhouse blogged early on about the 2009 Goldman shareholder letter and sensed there was trouble in River City. She was right - but I have learned she generally is. By looking at the word choices and the vocabulary utilized in shareholder letters, Rittenhouse has proven a correlation between the amount of “fog” in a letter and downstream share value.

Later that night at dinner with friends and colleagues, Goldman was one of the topics of conversation - at the end of the night we all shared a collective sigh of disgust and cynicism. The problem is clear. The dollars associated with making the deal are worth more than the value of the deal. Therefore, there is no duty of care or moral responsibility to the investor – and, if it is a “sh*tty deal”, the deal maker just invests in derivatives that bet against the deal so they make money when the deal tanks.

Senator Levin summed it up when he said, “You shouldn't be selling junk. You shouldn't be selling crap. You shouldn't be betting against your own customer at the same time you're selling to them." While not as a direct response, Goldman Sachs CEO Lloyd Blankfein indignantly expressed that clients who bought subprime mortgage securities from Goldman in 2006 and 2007 came looking for risk "and that's what they got."

Although we were at dinner to celebrate Mr. Buffett’s letters, it was another Buffett, Jimmy, whose words we sought for solace. “We need more fruitcakes in this world and less bakers! We need people that care! I'm mad as hell! and I don't want to take it anymore!" ...

April 20, 2010

Satellite technology is a wonderful thing. While traveling to Dallas this past Sunday, I was able to watch the Verizon Heritage golf tournament live from my coach seat on Continental Airlines. It was a particularly tight match - by the 10th hole, three players were in close contention for the championship. In professional golf, there are significant spoils to the winner. In this particular event, the winner received $1.03 million and second place received a paltry $616 thousand - with the dollars falling off to where 60th place made just over $11 thousand. This doesn’t even take into consideration the value of the FedEx Cup points, but I digress.

Going into the 18th hole, tournament leader Jim Furyk held a one stroke advantage over his playing partner Brian Davis. On the 18th, Davis hit a combination of great shots and tied the tournament with a birdie - at the end of regulation both players were tied at 13 under par and a sudden death playoff ensued. The Verizon Heritage golf course is one of the most precise courses on the PGA tour. The fairways are narrow, the greens are small, the bunkers and trees are large and the wind is brutal. The course was actually carved from a swamp and the remnants of reeds and undergrowth still abound.

As the players engaged the first hole of the sudden death playoff, Furyk’s second shot landed safely on the green about 30-40 feet from the pin. I’ve learned to never underestimate the prowess of professional golfers, but this clearly set up Furyk for a “Hail Mary” birdie putt to win. Davis’ second shot approached the green but caught the greenside bunker. The commentators expected the playoff to continue to the next hole - anticipating Furyk to 2-putt for par and Davis to successfully get “up and down” from the bunker for a similar par. Then something totally unique to golf occurred.

Immediately after hitting his bunker shot, Davis called a penalty on himself. In real time, no one saw his miniscule mistake, but the world collectively groaned as the TV replay showed his sand wedge ever so slightly tap a reed twig laying in the bunker on his backswing. The rule is clear, moving a twig in a bunker is against the rules, and Davis knew he had broken it. After a very painful five or six minute interval of muffled dialog and continuous TV replay of the infraction, the PGA rules officials confirmed it was a two stroke penalty – Furyk wins. After this righteous display of “self-governance” by Davis, I looked up this term on Wikipedia which classified it as an “abstract concept.”

My golfing partners and I play reasonably well, but not anywhere close to the level of the pros. In my group of 14-16 handicappers we don’t hold ourselves to this level of rule scrutiny, in fact, a foot wedge is one of the most commonly used clubs in our bag. We generally consider being in the rough punishment enough, so if your ball lands in a divot you get to move it out. After all, we aren’t playing for a million dollars.

As I continued my airborne journey, it just so happened I was on a connecting flight with a PGA official so I asked his opinion on the matter. He said something that made me think – “This is what makes golf special.” I couldn’t agree more, so when I got to the hotel I looked up how often this situation has occurred. The most extraordinary example of self-governance in professional golf was the 2008 self-disqualification of golfer J.P. Hayes. Hayes played a non-conforming (illegal) golf ball by mistake for one hole of a PGA Tour qualifying event in Texas.

Hayes subsequently disqualified himself from the tournament which made him ineligible to play fulltime on the PGA Tour in 2009. What an incredible example this sets for those of us who honor the game and struggle to get better. I then began to think. Wouldn’t it be great if the top corporations, the ones that I aspire to model EthicsPoint after, held themselves to this level of scrutiny?

I then recalled the complaints from many of my peers that the Sarbanes-Oxley guidelines and regulations under Section 404 were too onerous for small corporations. The smaller, less established corporations didn’t have the revenue to support these requirements. It was estimated that 404 controls cost $3-8 million to manage regardless if your company generated $1 million or $100 billion. Thankfully this law has been changed.

Just like the rules of golf are more appropriate for the pros, the 404 SOX controls were more appropriate for very large corporations, but tedious and overly burdensome to smaller organizations.

But back to self-governance. Why is it that we see the Enron’s of the world as the poster children for greed and deceit when they should be the shining example for self-governance? I could pontificate for another 1000 words on the why and what I think they should do, but I am more interested in what you think?

April 13, 2010

A couple of weeks ago I received a call in the wee hours of the morning that I had been dreading for months. My good friend and cousin called to tell me that his dad, my uncle, Howard Glenn “Jiggs” Childers had passed away at the age of 89. His health had been slowly deteriorating for several months and I knew it was just a matter of time before he succumbed. I share this story with you only because I think there is a message here we need to embrace.

During childhood and even into my 20’s and 30’s, my uncle’s children, grandchildren, siblings and other extended family complained about his controlling nature. They complained about his demanding personality and brutal honesty when you wandered outside his scope of approval. People would also comment that he never got his hands dirty – but as it turns out it wasn’t because he was lazy, it was because he insisted on orchestrating the tasks and organizing the projects.

He had an eye for detail, a sharp pencil when negotiating terms and a soft heart for any project that improved his community. He also loved the land. Many of you know that my parents were first generation ‘off the farm’ – both my dad and uncle were born in a 3-room house on the acreage their father farmed. I am proud to say, like my father, my uncle never forgot his roots. He was grounded by the land and the majesty of nature.

I flew to Oklahoma for the funeral and was immediately immersed with family, many of whom I had not seen since my dad’s funeral in 2007. I come from a big family and when you have a big family there tends to be a lot of bickering and strife. That wasn’t the case on this day. Everyone was there to honor my uncle who we recognized had touched each of our lives.

By the time I got to the service, it was apparent my uncle had touched the lives of many people. The 750+ people in attendance filled the neighborhood church, its gym and every other overflow area available - a truly amazing sight.

As the eulogies started I began to reflect on my uncle’s influence on my life. He was a man of integrity and insisted on honesty, fairness, love of God and family. He always put family first. As my peers began to express their sentiments I realized that what they were saying was true. During my 55 years on this Earth, I had never heard my uncle utter a harsh word – a stern word yes, but never in anger and always in love and directed at the best possible outcome for the situation. They spoke of his kindness and his compassion and how he made time for people and listened to their needs. The minster spoke of when he needed something done in the church – money, building, and supplies – he only needed to make one phone call. My uncle would tell him not to worry and the minister knew that someone would be calling soon to volunteer, provide the necessary items or discount their work to make it affordable for the church.

I also heard from every person I had grown up with who had so often criticized or bemoaned my uncle’s controlling nature and rigid expectations, acknowledge and appreciate his unwavering expectation of principled behavior. This day they spoke of how he had made them better and shaped them into who they were today. They also spoke as mature adults (most of us are 45+ today), of how his values and guidance had helped them formulate the way in which they shepherded their own families.

I began to reflect myself and I could only agree. I admired my uncle. His immediate family was just as idiosyncratic as mine, but they were tight and mutually supportive. They were all educated and had been provided the opportunity to excel. They each also carried a responsibility to serve their family, church of choice and community. I had a sobering moment because I realized these are character traits I demand from my six children and their spouses.

As the expressions of love and respect continued, I began to ponder and in fact question my own corporate leadership. I asked myself – am I demanding enough? Do I balk to be politically correct or “keep the peace”? Am I harsh with my tone or do I express my expectations with love and a calm firmness and set expectations that are both realistic and unwavering?

Then I began to reflect on what we do at EthicsPoint as compliance professionals. I realized we should set the same expectations for our organization – realistic and unwavering. I realized I worry too much about being loved in the moment and so I tread too softly when my management team fails to meet my expectations. Do you do the same in your company?

Have we become more concerned about turnover, morale, creating a “hip culture” or just avoiding the work it takes to stay the course instead of creating an unwavering expectation of principled based performance?

For me, I plan to dig deeper this year, work harder to inspire great leadership with my team and ensure that my values and expectations are visible and verbalized.

April 5, 2010

Laws created to ensure the open review of government information on the local, state and federal level, such as the Freedom of Information Act, are a good thing. Typically referred to as sunshine laws, these requirements were designed to make previously inaccessible government information available to the public. These laws not only apply to government documentation, they also grant the public and media access to government meetings.

I’m a huge proponent of the public’s right to know and of transparency. However, some consideration must be given to what falls within the public’s right to know when it comes to an organization’s internal issues, especially when an issue is communicated to a supervisor, manager, HR professional or through an employee hotline or other method for anonymous reporting.

EthicsPoint operates reporting hotlines and delivers case management solutions to more than 2,300 clients around the world. Last year, we collected over 150,000 cases from both the hotline and our clients’ web-based report forms. An analysis of these cases shows that 15-18% were found to be frivolous or unfounded, e.g., a rant or a malicious attempt to cast doubt on a co-worker or manager, while 10-15% were immediately actionable and/or contained enough specifics to allow the case manager to quickly resolve the issue or concern. The remaining 70+%, however, required a certain degree of finesse, exploration and as much ‘art as science’ to reach a point of resolution.

Recently, a high school principal in Texas abruptly retired after learning he was under investigation for allegedly sexually harassing one of his staff. His actions are not the subject of my concern, by all appearances the school district was doing a great job of seeking information and investigating the validity of the allegations. However, what does concern me is the media’s open records request for any documents pertaining to the investigation under the auspices of open records laws.

The school district’s counsel has wisely requested an opinion from Texas’ Attorney General seeking exemption from producing the documents. In her request, the counsel stated the document(s) “contains highly intimate or embarrassing facts, which if publicized would be highly objectionable to a reasonable person, and the information contained in the report is not of legitimate concern to the public.”

In 2007, another Texas school district took an entirely different path. They suspended the use of their hotline and case management system to avoid the unnecessary scrutiny the state’s sunshine law had created. In this instance, the sunshine law created the opposite effect for which it was designed. The school district retreated and many of the proven tools used to mitigate fraud and abuse were abandoned. As a result, the school district’s interests weren’t served and the people charged with protecting the school district’s interests were technologically handicapped in their ongoing efforts.

This isn’t just a Texas phenomenon. In 2009, an Arizona reporter acknowledged – “Official action by government should be public and transparent. But I think the body politic suffers – in terms of competence, efficiency and effectiveness – by making our government employees work in a fish bowl. But these broad, sweeping public-records requests are clearly fishing expeditions, intended to harass and intimidate. And as such, they constitute a threat to the rule of law.”

So while I passionately believe in bringing visibility and transparency to the issues and events that pose risk to any organization, I also feel the unintended consequences of sunshine laws have the potential to dramatically limit accountability unless they are limited in scope. How do you feel about this and do you think that open information laws should have some governing guidelines in protecting privacy, relevance and appropriateness?